House's Frank Says Muni-Bond Ratings Are `Ridiculous'

Bloomberg) -- U.S. Representative Barney Frank said it is ``ridiculous'' that bond-rating companies apply tougher standards to local government debt as he prepares to hold a hearing on the soaring interest costs of municipalities.

California Treasurer Bill Lockyer and other state officials are calling for Standard & Poor's, Moody's Investors Service, and Fitch Ratings to change a system they say costs taxpayers by exaggerating the risk that states and cities will default on their debts. Every state except Louisiana would be AAA if measured by the scale used for corporate borrowers, according to research by Moody's Investors Service.

``This notion of having a separate standard for the municipals because they would do too well on the other standard is ridiculous,'' Frank, the Democrat who chairs the House Financial Services Committee, told reporters in Washington yesterday.

Frank's committee today opens a hearing into how states, local governments and other tax-exempt borrowers, which have $2.6 trillion of debt outstanding, are being hurt by the crisis in confidence in U.S. financial markets. The interest costs on auction-rate securities, a type of debt used by municipalities, has almost doubled since January and investors have also demanded higher yields on tax-exempt bonds backed by insurers that are struggling to maintain their own credit ratings.

Insurers' Investments

``The bad investments they have made have dragged down the value of the municipal issuers and cost money for people who want to build schools and roads,'' Frank said in a Bloomberg Television interview today.

Lockyer at today's hearing plans to ask Congress to pressure the rating companies to change their system, spokesman Tom Dresslar said. Other witnesses set to testify include Ajit Jain, the chairman of Berkshire Hathaway Assurance Corp., Laura Levenstein, a senior managing director for Moody's, and New York's superintendent of insurance, Eric Dinallo.

``The current system makes no sense,'' said Dresslar. ``Taxpayers wind up paying billions of dollars in higher interest rates and insurance premiums.''

Because ratings are typically lower on the municipal scale, local governments have paid insurance companies to back their bonds with AAA ratings, seeking to reduce borrowers' costs. With insurers' ratings under pressure because of losses on mortgage debts, states, cities and hospitals have faced higher interest costs on floating-rate bonds backed by the guarantors as investors shun the debt.

 

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Market slips on economic fears, McDonald's gains

(Reuters) - U.S. stocks slipped on Monday as mounting concerns about the economy overshadowed stronger-than-expected same-store sales from McDonald's Corp

 

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Carlyle Capital Says Lenders May Force Further Sales

(Bloomberg) -- Carlyle Group's mortgage-bond fund said creditors may liquidate as much as $16 billion of securities unless the two sides reach agreement on debt repayments.

The fund has asked lenders to refrain from further sales after they liquidated collateral securing $5 billion of debt, Carlyle Capital Corp. said in a statement today. It is meeting lenders to discuss more than $400 million of margin calls and is ``evaluating all options,'' the Guernsey, Channel Islands-based fund said.

Carlyle Capital used loans to buy about $22 billion of AAA rated mortgage debt issued by Fannie Mae and Freddie Mac, which the firm says have an ``implied guarantee'' from the U.S. government. Even the safest mortgage bonds have slumped following the collapse of the subprime-mortgage market, leading to the failure of hedge funds led by Peloton Partners LLP.

``This particular Carlyle entity wasn't prepared,'' said Philip Keevil, a senior partner in London at Compass Advisers LLP and former head of European mergers at Salomon Smith Barney Inc. ``They hadn't started selling ahead of time and now they're having trouble liquidating their positions.''

Started by David Rubenstein 21 years ago, Carlyle expanded its mortgage investments last year, selling $300 million of shares in Carlyle Capital.

``Due to recent turmoil in the market for mortgage-backed securities, the company's lenders have significantly reduced the amount they are willing to lend against the company's portfolio of U.S. government agency AAA-rated residential mortgage-backed securities,'' Carlyle Capital said today.

 

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Blackstone Profit Falls 89% on Credit Market Meltdown

(Bloomberg) -- Blackstone Group LP, manager of the world's largest buyout fund, said fourth-quarter profit plunged 89 percent after a ``meltdown'' in the credit markets and warned that getting loans for takeovers will be hard in 2008.

Profit excluding costs tied to its June initial public offering declined to $88 million, or 8 cents a share, from $808.1 million, or 72 cents, a year earlier, the New York-based company said today in a statement. Blackstone fell as much as 5.2 percent in New York trading as earnings missed analysts' estimates.

``Credit market problems persist and if anything have gotten worse,'' Blackstone President Tony James said on a conference call with reporters today. ``We're looking to 2009 before we see much of an improvement.''

Blackstone, which has lost 55 percent of its market value since the IPO, hasn't completed a takeover of more than $2 billion in five months as credit costs doubled and the LBO market shut down. It's struggling to close the $6.6 billion buyout of Alliance Data Systems Corp., the Dallas-based credit- card processor, announced in May.

Earnings were hurt by a decline in fees earned by completing acquisitions and a writedown of its investment in New York-based bond insurer Financial Guaranty Insurance Co. Blackstone invested $2.33 billion of capital in the quarter, down 31 percent from a year earlier.

Net Loss

``Among the risks are that LBO financing conditions continue to worsen and erode Blackstone's ability to earn sufficient private-equity returns,'' Bank of America Corp. analyst Michael Hecht wrote in a March 6 report to investors. Hecht, who is based in New York, cut his fourth-quarter estimate to 11 cents from 25 cents. The average estimate of seven analysts surveyed by Bloomberg was 20 cents a share.

Blackstone fell 55 cents, or 3.7 percent, to $14.03 at 10:17 a.m. in New York Stock Exchange composite trading. It earlier fell to $13.82, the lowest since the IPO.

Blackstone reported a fourth-quarter net loss of $170 million because of compensation costs tied to the IPO. Revenue rose 17 percent to $3.05 billion. The firm agreed to buy GSO Capital Partners LP for as much as $930 million in January to expand investments in distressed debt and leveraged loans.

``Despite the meltdown'' in credit markets, the company sees deal opportunities, especially in Asia, Chairman Stephen Schwarzman said in the statement.

Assets under management jumped 47 percent to $102.4 billion, driven by real estate, which doubled to $26.1 billion. Money-management assets rose 65 percent to $44.5 billion. Private-equity assets gained 7 percent to $31.8 billion.

Blackstone as Proxy

LBO financing evaporated last July as banks and investors pulled out of the market amid the fallout from rising subprime- mortgage delinquencies. The value of deals announced in the second half of 2007 plunged two-thirds from the first six months, according to data compiled by Bloomberg.

``We're a proxy for the credit markets,'' Blackstone President Hamilton James said at the Super Returns private equity conference in Munich on Feb 26.

Still, seven of the eight analysts who rate Blackstone recommend clients buy the stock, including Hecht. The other recommendation is a ``hold.''

Other publicly traded companies that make private-equity investments also have suffered. New York-based Fortress Investment Group LLC has fallen 58 percent in the past year, while 3i Group Plc of London has lost 42 percent.

 

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Lego wants to build business with girls

(Reuters) - Nine-year-old Ida Fraende, who likes to play with Lego bricks, is not so unusual in Scandinavia but globally speaking she is not typical: Jorgen V. Knudstorp hopes to change that.

The Chief Executive of Europe's largest toymaker, who has brought the once-troubled group back to profit and renewed its growth ambitions, has a keen eye on the market where Mattel and Hasbro of the United States are the mom and pop.

Girls are an area where "we'll never stop trying," Knudstorp, who joined the family-owned firm in 2001 from consultancy McKinsey & Company, told Reuters.

"I think there is something that genetically skews us towards boys, but we can do better."

To win girls over Lego -- whose iconic plastic bricks have entertained children and wounded unwary barefoot parents since the late 1940s -- is working to change its mindset, and taking its bid for their custom online.

The firm founded in 1932 by carpenter Ole Kirk Christiansen intends next year to launch an online Lego Universe, to tap into a booming market that has created successes such as Second Life and World of Warcraft.

The group which started out with wooden toys like ducks and trucks has recovered from a massive 1.9 billion Danish crowns ($388 million) loss in 2004 and managed to build market share in a stagnant global market.

 

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Wal-Mart's February Sales Rise; Gap, AnnTaylor Fall

(Bloomberg) -- Wal-Mart Stores Inc.'s February sales gained more than it expected as cash-strapped consumers seeking food and basic clothing cut spending at Limited Brands Inc., AnnTaylor Stores Corp. and Gap Inc.

Wal-Mart, the world's largest retailer, said today in a statement that sales at stores open at least a year rose 2.6 percent last month, beating its estimate for a gain of 2 percent or less.

Shoppers headed to discounters and warehouse clubs to stock up on food and necessities, shunning lightweight jackets and sweaters at department stores and mall-based retailers. A decline in jobs, gasoline costing more than $3 a gallon and the continued erosion of the housing market have caused consumers to limit spending.

``We are seeing the consumer trading down,'' Fred Crawford, managing director at AlixPartners LLP, a Southfield, Michigan-based consulting firm, said in a Bloomberg Radio interview. ``You've got a large swing set in Middle America. In good times, they buy up into department store categories, and in tougher times, they buy down into mass categories.''

U.S. retailers' same-store sales may have risen 0.5 percent to 1 percent last month, according to the International Council of Shopping Centers. The New York-based trade organization reports monthly results later today.

Companies in the U.S. unexpectedly lost 23,000 jobs in February, the first decline in almost five years, according to a private report based on payroll data from ADP Employer Services released yesterday. The University of Michigan/Reuters index of consumer confidence fell last month to its lowest level since 1992.

Retail Shares

Wal-Mart climbed 55 cents, or 1.1 percent, to $50.10 at 8:19 a.m. in trading before the New York Stock Exchange opened. Gap fell 4.7 percent.

The 31-member Standard & Poor's 500 Retailing Index has dropped 5.2 percent this year before today, compared with a 9.2 percent decline for the S&P 500 Index.

Limited Brands, the owner of the Victoria's Secret lingerie chain, said February same-store sales dropped 9 percent, better than analyst estimates for a 10.9 percent drop.

Staples Inc., the world's largest office-supplies retailer, reduced its full-year profit and sales forecast March 4 as customers at its North American retail stores reduced purchases of copiers and desks.

``The core economy, the part that's really relevant to Staples and Staples' customers, is declining,'' Staples Chief Financial Officer John Mahoney said in a telephone interview. ``From the perspective of our customers and our business, this is a recession now.''

February Sales

February tends to be the least important sales month in the first quarter for many retailers, comprising about 30 percent of discounters' quarterly revenue, according to Christine Augustine, a retail analyst at Bear Stearns Cos.

With ``sluggish'' traffic, most retailers may be ``playing defense'' by managing inventory and cutting costs, she wrote in a Feb. 29 research note.

``Aside from Valentine's Day and President's Day, and the demand for consumables and other necessities, we think consumers had few reasons to shop in February, particularly given the tough economic backdrop,'' Augustine wrote.

AnnTaylor, the clothing retailer that caters to women ages 25 to 55, said February same-store sales dropped 1.7 percent, less than the average analyst forecast for a 3.1 percent decrease. Gap, the largest U.S. clothing retailer, said sales fell 6 percent, almost twice the 3.1 percent decline estimated by analysts.

 

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European Stocks, U.S. Index Futures Decline; Asian Shares Rise

 (Bloomberg) -- European stocks fell for the third day this week and U.S. index futures declined on concern credit- market losses will widen at financial companies and record oil prices will curb airline earnings.

UBS AG sank to the lowest since 2003 after JPMorgan Chase & Co. said Europe's biggest bank probably sold $24 billion in holdings of mortgage-backed securities in a ``fire sale.'' Aegon NV, the second-largest Dutch insurer, lost the most in three weeks on a 26 percent drop in earnings. British Airways Plc had its steepest decline in a week, saying its profit margin will drop.

A rally in mining companies helped Asian stocks rise for the first time in six days, while U.S. index futures fell before a report that will probably show contracts to buy previously owned homes slipped in January for a third month.

``News from the financial industry brings a negative wind,'' said Laurent Vallee, who helps oversee $6.1 billion at Richelieu Finance in Paris. ``We remain cautious on financial stocks.''

Europe's Dow Jones Stoxx 600 Index lost 0.3 percent to 314.62 as of 12:45 p.m. in London. Futures on the Standard & Poor's 500 Index slipped 0.5 percent, while the MSCI Asia Pacific Index added 1.8 percent.

Stocks maintained their losses after the European Central Bank left its key interest rate unchanged. ECB President Jean- Claude Trichet is scheduled to brief reporters at 2:30 p.m. Frankfurt time. The Bank of England earlier kept its benchmark rate on hold.

The Stoxx 600 has lost 14 percent this year on concern the collapse of subprime mortgages and a slowdown in the U.S. economy will curb profit growth in Europe. UBS may have writedowns of about $18 billion after unloading 25 billion Swiss francs of mortgage-backed securities, according to JPMorgan.

Money Markets

Carlyle Capital Corp., which invests in AAA rated mortgage securities, failed to meet margin calls and said today it received a notice of default, while Thornburg Mortgage Inc., a U.S. specialist in adjustable-rate loans too big to be sold to Fannie Mae and Freddie Mac, also received a default notice on a $320 million loan.

The cost of borrowing euros for three months rose to the highest level in seven weeks, fueling concern a coordinated effort by central banks to limit the fallout from the U.S. housing slump and revive lending is faltering.

UBS dropped 2 percent to 31.6 francs. Europe's biggest bank by assets ``likely'' sold its 25 billion francs ($24 billion) prime Alt-A portfolio in a ``fire sale,'' JPMorgan said as it lifted its ``credit-crisis'' writedown estimate for the bank to 18.5 billion francs.

 

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